The FTSE 250’s QinetiQ (LSE: QQ) is certainly not a household name. But it sits at the centre of some of the most advanced defence‑technology work happening anywhere in the world.
As governments accelerate investment in next‑generation capabilities, its blend of robotics, sensors and mission‑critical testing makes it a pivotal player in a sector undergoing profound change.
Fortunately for long-term investors, a disconnect between its strategic importance and its market pricing has emerged. So, how much is it and where should the shares really be trading?
Stunning earnings growth ahead
Earnings growth powers any firm’s share price over the long run. A risk for QinetiQ is a failure in any of its key systems, which may be expensive to fix and could damage its reputation. Another would be any delays or cancellations in government defence spending that could reduce demand for its services.
However, consensus analysts’ forecasts are that its earnings will grow by a whopping 77% average a year to end-2028. This looks well supported to me by growing momentum evident in its recent results and statements.
In its Q3 trading update, the firm said it expects earnings per share growth this fiscal-year 2026 of 15%–20%. Management also forecasts an operating margin of roughly 11%, underpinned by more than £3bn of orders secured year‑to‑date. This included a £205m five‑year Typhoon engineering extension and £87m of laser‑technology contracts, lifting the order backlog to about £5bn.
Such contracts highlighted QinetiQ’s strengthening position in high‑priority defence programmes that are set to expand significantly. NATO members have pledged to lift combined defence budgets to 5% of GDP by 2035, up from 2% last year, equating to $423bn (£314bn) in additional annual spending across non‑US members alone.
It is a long-term structural shift towards boosting deterrence to deter aggression, rather than a temporary fix to short-term conflicts. So, while some might see buying defence stocks as ‘profiting from war’, I see it as part of the process of underwriting peace through deterrence.
How undervalued is it?
Discounted cash flow (DCF) analysis pinpoints a company’s fair value by projecting its future cash flows and then discounting them back to today.
Analysts’ DCF modelling results can differ widely, based on the variables used — running more bearish than mine at times. In QinetiQ’s case, using a discount rate of 8.6%, my modelling suggests the stock is 33% undervalued at its current £4.75 price.
That implies a fair value of £7.09 — considerably higher than where the stock trades today.
The gap between price and value is critical to long-term investor profits because asset prices tend to converge to their fair value over time. In this case, the gap suggests a potentially terrific buying opportunity to consider today if those DCF assumptions hold.
My investment view
I already hold BAE Systems and Rolls-Royce shares, both of which I am happy with. Buying another share in the same business would unsettle the risk/reward balance of my portfolio.
So, QinetiQ is not for me right now, and I have my eye on other undervalued stocks in different sectors.
However, for other investors without the same portfolio balancing problem, I think QinetiQ looks like a rare opportunity hiding in plain sight.
